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Why economic growth (and rates) could increase faster than expected

We’ve upgraded our predictions for how the major economies around the world will perform in the next two years. Here, we briefly explain why and summarise our predictions.

06-03-2018

Keith Wade

Chief Economist and Strategist

Donald Trump’s plan to boost the US government’s spending by $300 billion has added fuel to a US and global economy already firing on all cylinders.

The effect of the Bipartisan Budget Act of 2018 which detailed these plans (which also include a further $90 billion in disaster relief spending) will be felt far beyond the shores of the US.

As a result, we have increased our growth forecasts for almost all major economies around the globe. It’s also caused us to change our predictions for the path of interest rates. By the end of 2019, we now expect US rates to have reached 3% and for the UK to hit 1.25%.

How much economic growth will we see in 2018 and 2019?

Global: We are upgrading our global growth forecasts to 3.5% for 2018 (previously we predicted 3.3%) and 3.3% for 2019 (from 3.0%). This is not just down to the US’s spending plans; data from purchasing managers surveys, business and consumer confidence are also buoyant. Indeed, our indicator of global economic activity is at its highest level in seven years.

US: We are upgrading US GDP growth in 2018 to 3.1% (previously 2.5%) and in 2019 to 2.9% (from 2.2%).

Stronger demand in the US also feeds through in to stronger trade and better growth elsewhere.

Eurozone: Latest economic data confirms our view that the European economic recovery is both gathering momentum and broadening out. We are upgrading our eurozone growth forecast for 2018 to 2.6% (previously 2.3%) and for 2019 to 2.2% (from 1.9%).

UK: We are even upgrading the UK, which has gone from being one of the best-performing economies between 2013 and 2016, to being the worst performing economy in the G7. The upgrade for 2018 to 1.7% (from 1.6%) and for 2019 to 1.5% (from 1.4%) is thanks largely to the stronger outlook for its major trading partners.

China: We are upgrading our China forecast to 6.6% for 2018 (previously 6.4%) and 6.5% for 2019 (from 6.3%).

Emerging markets: Led by the increase in the forecast for China, we are upgrading our 2018 forecast to 5.1% and in 2019 to 5.0%.

Japan: The only major economy we are downgrading, we now forecast Japan’s growth in 2018 to be 1.5% (previously 1.8%). This follows a disappointing fourth quarter of 2017.

What does this mean for interest rates?

US: The Fed has now started balance sheet reduction (quantitative tightening) and with core inflation rising, we expect four more rate hikes in 2018, and two in 2019, ending the forecast at 3%.

Eurozone: The ECB is likely to end quantitative easing in September 2018, before raising interest rates three times in 2019, with the refinancing rate reaching 0.75%, and the deposit rate reaching 0.25%.

UK: The Bank of England (BoE) is ready to hike faster due to concerns that supply constraints will cause inflation to rise. We expect the BoE to raise interest rates once in 2018 and twice more in 2019 (to 1.25%). We predict 2018’s rate rise to arrive in November, but markets suggest it could be as soon as May.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.